A Millennial's Guide to Building Credit

It’s no secret that millennials are extremely reluctant to take on debt. Not only are most of us already suffocating under the crushing weight of student loans, we also came of age during a time of great economic turmoil. We watched as people lost their jobs, their homes, their retirement funds, and ultimately, their livelihoods. The recession left a bad aftertaste that can’t be washed away easily.

Perhaps this is why millennials are so squeamish when it comes to credit cards. According to data from the Federal Reserve, the percentage of Americans under the age of 35 who hold credit card debt has fallen to its lowest level in almost 30 years. Unfortunately, this also means we have extremely low credit scores—and that’s a serious problem.

Why You Need Credit

Though sticking with cash and debit cards is certainly more financially responsible than spending money you don’t actually have, shunning credit cards entirely has consequences. It’s almost impossible to build credit without a credit card, and a good credit score is a deciding factor in whether or not you’ll be authorized for a mortgage, approved to rent an apartment, or given a car loan.

Your credit score is also used to determine what type of interest rates you get when you take out loans; the lower your score, the higher your interest rate will be. A strong credit score can save you money and pave the way for financial independence.

Get The Right Card

Having a revolving credit account (i.e. a credit card) is particularly important as your “credit mix” accounts for 10% of your FICO credit score. Before choosing a card, carefully review their interest rates, fees and penalties, and membership incentives. If you currently have a low credit score (or no credit history at all), it’s likely that the cards you are eligible for will have a high interest rate.

If you’re worried you won’t be approved due to your credit history, consider applying for a secured credit card. Secured credit cards are usually obtained through banks or credit unions and require a security deposit. The amount of the deposit is equivalent to the credit line, and thus serves as collateral. It’s not difficult to obtain approval for a secured credit card as there is very little risk to the lender.

Keep Your Credit Utilization Ratio Low

It may be tempting to take advantage of large credit limits, but it’s unwise. First, this likely means you’re spending money you don’t have, which is a bad financial behavior that you do not want to make a habit. Second, credit utilization ratio accounts for 30% of your credit score. This ratio is calculated by comparing the total amount of revolving credit you use per month with the total amount of credit you have available. Experts recommend using no more than 30% of your total available credit (ideally only 10%).

Pay Your Balances In Full

Your payment history has the most impact on your credit, accounting for 35% of your credit score. That’s why making late payments and carrying a large balance from month to month can absolutely destroy your credit. If you really want to build credit, treat your credit card like a debit card. Buy only what you can afford and pay the balance in full before the end of each month. Companies like Debitize can help you do this more easily.

Another way to easily build credit is to link a small, fixed expense to your credit card—something you know you can pay off each month, like your Netflix or Hulu subscription. It’s a simple, worry-free way to build credit without overspending.

Conclusion

One of the most difficult things about building credit is how long it takes to see the rewards of your hard work and how easy it is to completely derail everything. As long as you continue to make thoughtful, educated decisions, your credit score will improve with age. Be smart, be patient, and check your credit report for errors at least once a year. You’ve got this!

About the AuthorLiz Greene is a makeup loving, dog hugging, anxiety-ridden realist from the gorgeous City of Trees, Boise, Idaho. You can follow her on Twitter @LizVGreene or catch her latest misadventures on her blog, Instant Lo.